We know less about inflation than we thought

On Friday, I wrote about a paper from several influential economists that was going the rounds. It talked about the ineffectiveness of jobs market slack and inflation expectations as a predictor of price rises.

Today, the WSJ has a more in depth look at the paper and prices. It outlines how wages aren't negotiated like traditional economic models assume because power dynamics between workers and employers shift due to things like globalization, unionization and changing government policy.

"Analysts and investors are paying closer attention to indicators like corporate margins and the amount of industry concentration. Fatter profits allow companies to respond to rising commodity and labor costs without increasing prices, but a position of monopoly can lead them to pass on costs to consumers regardless," the WSJ writes.

Take Coca-Cola. It's Warren Buffetts' favourite 'moat' because it's a monopoly. The costs of water, shipping, sugar and manufacturing don't explain the final price of the product. Instead, it's market share and how effectively the company can leverage its dominant position.

The article also has an interesting anecdote of a former ECB governor who made a bet in 2013 that inflation was about to jump. It underscores how confident (and wrong) they were in inflation theory.